2025 (6) TMI 1697 - AT - Income Tax

Addition u/s 68 - cash deposited in Bank during demonetization period - unexplained sources - as argued assessee had discharged his onus of explaining the source of cash deposited in the bank account by furnishing his cash book and the entire case of the Revenue only on presumptions and assumptions which were also explained satisfactorily by the assessee. HELD THAT - Assessee had furnished his entire books of account including his cash book explaining the source of cash deposit in the bank account during the demonetization period. Details of cash flow/ cash book of the preceding year was also filed and these details clearly reflected a pattern of huge withdrawals made by the assessee every month and the same being deposited in the bank account of the assesse. Assessee has given the reason for keeping huge cash in hand every month pointing out that it is in the business of quarrying mines and since it works in remote areas in difficult conditions it requires cash in hand to meet any medical or other emergency of which there is always a huge risk. Revenue authorities have pointed no infirmity in the Books of accounts maintained by the assessee nor the reasons given by the assessee for keeping huge cash balance. There is no question therefore of doubting the source of cash deposited in bank. Undisputedly the Revenue has only doubted the source of cash deposited during demonetization despite the records revealing cash deposit to be a regular feature throughout the year by the assessee. We agree with assessee that without any cogent reason the Revenue cannot cherry pick transactions for doubting the same. As for the fact that the assessee chose to deposit the cash in hand during the demonetization in tranches the assessee we have noted had explained reason for the same also as since its business requirement of cash in hand remaining and with the restrictions in place on cash withdrawals from bank during demonetization period the assessee did not deposit all SBN notes available as on 08-11-16 in one go but in tranches. The assessee also pointed out that there was no bar under the demonetization law of meeting medical expenses with SBN s. Assessee chose to keep SBN s in hand during demonetization period depositing them only in tranches. Again we agree with assessee the Revenue has failed to point out any infirmity in the aforestated explanation of the assessee. In the absence of the same the Revenue cannot hold the cash deposits as suspicious for the said reason. Also the discrepancy noted of the entire cash in hand available as on 08.11.2016 being deposited during demonetization period all being by way of SBNs which the Revenue authorities have found to be highly improbable we do not find any merit in the same. We see no reason to doubt entire amount available with the assessee as on 08.11.2016 to be in specified bank notes. Moreover the short fall of the cash deposited in bank during the demonetization to the balance available as on 08.11.2016 leading to the interference by the Revenue that the assessee had taken SBNs during the demonetization period against the provisions of law we agree with the assessee cannot lead to any doubt being expressed about the source of cash deposits in the bank account of the assessee. The assessee may have been debarred by law from accepting SBNs but the fact that the assessee did accept SBNs and deposit it in the bank account thus flouting the demonetization law is not highly improbable. As rightly pointed out by the Ld. Counsel for the assessee the consequence of the same lay under the demonetisation law and not under the Income Tax Act. Assessee we hold had duly discharged its onus of explaining the source of cash deposit in its bank account during demonetization period and the findings of the Revenue treating the same as non-genuine are merely on presumption and assumption. The addition made therefore we hold of cash deposited during the demonetization period u/s 68 of the Act is not sustainable in law and is directed to be deleted. Assessee appeal allowed.

Summary

The core legal question considered in this appeal is whether the addition of Rs. 46,32,000/- made under Section 68 of the Income Tax Act, 1961, on account of cash deposits during the demonetization period, was justified. The key issues revolve around the genuineness and source of the cash deposits made in specified bank notes (SBNs) during the demonetization period, the credibility of the cash balance shown as on 08.11.2016, and whether the assessee satisfactorily explained the source of such deposits to rebut the presumption of unexplained income under Section 68.

The Tribunal examined the following issues:

• Whether the cash deposits made during the demonetization period were from unexplained sources warranting addition under Section 68.
• The validity of the assessee's explanation that the cash deposited during demonetization was out of cash in hand as on 08.11.2016 and withdrawals from bank accounts made in the ordinary course of business.
• The credibility of the cash balance shown by the assessee on 08.11.2016, especially in light of the pattern of cash withdrawals and deposits.
• The reasonableness of depositing cash in tranches during demonetization and whether such conduct is suspicious.
• The applicability of precedents and principles relating to the burden of proof and human conduct in cash transactions during demonetization.

Issue-wise detailed analysis is as follows:

1. Addition under Section 68 on account of cash deposits during demonetization period

Relevant legal framework and precedents: Section 68 of the Income Tax Act requires that where any sum is found credited in the books of an assessee and the assessee fails to satisfactorily explain the source thereof, the sum may be charged to income tax as income of the assessee. The burden lies on the assessee to explain the source of such credit. Precedents such as the Delhi High Court decision in Shashi Garg v. Pr. CIT (113 taxmann.com 92) were relied upon by the Revenue to uphold the addition where staggered withdrawals and deposits were found suspicious.

Court's interpretation and reasoning: The Assessing Officer (AO) disbelieved the cash deposits during demonetization on multiple grounds: the cash withdrawals made without corresponding expenses, the improbability that the entire cash balance as on 08.11.2016 was in SBNs, the staggered nature of deposits during demonetization, and the discrepancy of approximately Rs. 2,50,529/- between cash balance and deposits. The AO concluded that the cash balance was manipulated to accommodate the deposits, thus treating the deposits as unexplained income under Section 68. The CIT(A) confirmed these findings, emphasizing the improbability of the cash balance being entirely in SBNs and the unusual staggered deposits as against normal human conduct.

Key evidence and findings: The AO and CIT(A) relied on the pattern and dates of cash deposits during demonetization, the cash book maintained by the assessee, and the historical cash balances from previous years. They noted that the cash balance as on 08.11.2016 (Rs. 44,12,071/-) was inconsistent with prior years' cash balances, which were significantly lower. The staggered deposits over approximately 40 days were considered suspicious and inconsistent with the expected immediate deposit of demonetized currency.

Application of law to facts: The authorities applied the principle that unexplained cash credits can be added under Section 68 if the assessee fails to provide a satisfactory explanation. The improbability and inconsistencies in the cash balance and deposit pattern led them to reject the assessee's explanation and uphold the addition.

Treatment of competing arguments: The Revenue rejected the assessee's explanation of cash in hand and business exigencies as insufficient and improbable. The assessee's contention that the cash deposits were from legitimate business sources and withdrawals was not accepted by the AO or CIT(A).

Conclusion: The authorities below held the addition under Section 68 to be justified on the ground that the source of cash deposits during demonetization remained unexplained and the cash balance as on 08.11.2016 was manipulated.

2. Assessee's explanation regarding cash balance, withdrawals, and deposits

Relevant legal framework and precedents: The assessee bears the onus to explain the source of cash credits. However, explanations supported by books of accounts, cash books, and consistent business practices are relevant. The Supreme Court decisions in CIT v. Durgaprasad Morey (1971) and Sumati Dayal v. CIT (1995) emphasize that additions must be based on evidence beyond mere suspicion and must consider human conduct and business realities.

Court's interpretation and reasoning: The assessee explained that the cash deposited during demonetization was from cash in hand as on 08.11.2016 and withdrawals from bank accounts made in the ordinary course of business. The nature of business (quarrying and mining) necessitated maintaining substantial cash on hand for emergencies, including medical exigencies at remote locations. The staggered deposits were explained as a practical necessity due to restrictions on cash withdrawals and the need to keep some cash available for emergency expenses, which were permitted under demonetization rules.

Key evidence and findings: The assessee submitted detailed cash flow statements for the year and preceding years, showing regular withdrawals and deposits, business receipts, and expenses. The cash book and books of accounts were maintained and audited. The pattern of cash balances and turnover was consistent with the business nature. The assessee also pointed out that the Revenue did not dispute the books of accounts or the profit element offered to tax.

Application of law to facts: The Tribunal noted that the Revenue did not point out any infirmity in the books of accounts or cash book maintained by the assessee. The explanation regarding business exigencies and the need for cash on hand was found reasonable and consistent with the facts. The Revenue's suspicion was based on assumptions and did not amount to proof beyond reasonable doubt.

Treatment of competing arguments: The assessee's counsel argued that the Revenue's reliance on presumptions and conjectures was misplaced and that the addition under Section 68 was not sustainable without cogent evidence. The Revenue contended that the staggered deposits and cash balance were improbable and manipulated. The Tribunal found the assessee's explanation credible and the Revenue's arguments unsubstantiated.

Conclusion: The Tribunal held that the assessee had discharged the onus of explaining the source of cash deposits during demonetization satisfactorily and that the addition under Section 68 was not justified.

3. Credibility of cash balance as on 08.11.2016 and pattern of deposits

Relevant legal framework and precedents: The credibility of cash balances shown in books is a factual determination. The courts have held that additions cannot be made on suspicion alone and human conduct and business realities must be considered. The Delhi High Court decision in Shashi Garg was noted by the Revenue but the Tribunal distinguished the facts.

Court's interpretation and reasoning: The Tribunal observed that while the Revenue found it improbable that the entire cash balance was in SBNs, it did not find this improbability sufficient to reject the assessee's explanation. The staggered deposits were explained by the assessee as a practical response to demonetization restrictions and business needs. The Tribunal also noted that the Revenue failed to demonstrate any manipulation or falsification of the cash balance.

Key evidence and findings: The cash balances from previous years showed lower amounts, but the Tribunal accepted the explanation that the nature of business and exigencies could justify higher cash balances at times. The pattern of deposits and withdrawals was consistent with the business operations as explained.

Application of law to facts: The Tribunal applied the principle that mere improbability or suspicion does not suffice to reject the assessee's explanation. The burden on the Revenue to prove undisclosed income was not discharged.

Treatment of competing arguments: The Revenue's argument that staggered deposits and high cash balances were against normal human conduct was rejected as the assessee's explanation was plausible and consistent with business exigencies.

Conclusion: The Tribunal found no reason to disbelieve the cash balance shown as on 08.11.2016 or the pattern of deposits during demonetization.

4. Applicability of demonetization law and its impact on income tax proceedings

Relevant legal framework: Demonetization laws restricted the use of specified bank notes (SBNs) after 08.11.2016. However, violations of demonetization laws do not automatically translate into tax evasion under the Income Tax Act unless unexplained income is established.

Court's interpretation and reasoning: The Tribunal noted that even if the assessee accepted and deposited SBNs in violation of demonetization laws, the consequence of such violation lies under the demonetization law and not under the Income Tax Act. The Income Tax proceedings must be based on the explanation of source and genuineness of income.

Key evidence and findings: The assessee's explanation for depositing SBNs in tranches was accepted as reasonable given the restrictions on withdrawals and the need to keep cash for emergencies.

Application of law to facts: The Tribunal held that the Revenue cannot treat the violation of demonetization law as evidence of unexplained income under the Income Tax Act without independent proof.

Treatment of competing arguments: The Revenue sought to rely on the fact of acceptance of SBNs as suspicious, but the Tribunal held that this was not a ground for addition under Section 68.

Conclusion: The Tribunal held that demonetization law violations, if any, do not justify addition under Section 68 in absence of unexplained income.

Significant holdings:

"The assessee had furnished his entire books of account, including his cash book explaining the source of cash deposit in the bank account during the demonetization period. Details of cash flow/ cash book of the preceding year was also filed and these details clearly reflected a pattern of huge withdrawals made by the assessee every month and the same being deposited in the bank account of the assessee."

"The Revenue authorities have pointed no infirmity in the Books of accounts maintained by the assessee nor the reasons given by the assessee for keeping huge cash balance. There is no question therefore of doubting the source of cash deposited in bank."

"Without any cogent reason the Revenue cannot cherry pick transactions for doubting the same."

"The addition made, therefore, we hold of cash deposited during the demonetization period of Rs. 46,32,000/- u/s 68 of the Act is not sustainable in law and is directed to be deleted."

The core principles established are:

• The burden of proof under Section 68 lies on the assessee to explain the source of cash credits, but explanations supported by books of accounts and consistent business practices must be accepted unless disproved by cogent evidence.
• Additions cannot be made on mere suspicion, conjecture, or improbability; human conduct and business exigencies must be considered.
• Violation of demonetization laws does not automatically imply unexplained income under the Income Tax Act.
• The Revenue cannot selectively doubt only certain transactions without justifiable reasons.

Final determination: The addition of Rs. 46,32,000/- under Section 68 on account of cash deposits during demonetization period was not sustainable. The assessee had satisfactorily explained the source of cash deposits, and the Revenue's reliance on presumptions and conjectures was rejected. The appeal was allowed, and the addition was deleted.